Should you save three times your salary before you’re 40 to retire?

Financial advisers may wheel out these statistics, but in today’s precarious times what’s needed is sensible saving and government help

‘According to Jean Chatzky, by 40 it should be three times your annual income; by 50, six times; by 60, eight times and by retirement 10 times.’ Photograph: Alamy Stock Photo.

How much should you be saving – and have banked already – for your retirement? Listen to the financial industry, and the answer is an awful lot more than you probably have.

According to Jean Chatzky, a financial journalist at US network NBC, by the time you are 30 you should have at least the equivalent of your annual income saved for retirement. By 40 it should be three times your annual income; by 50, six times; by 60, eight times and by retirement 10 times. How do you do that? You save 15% of your income every year (most of it into the stock market) from the age of 25 onwards.

Chatzky has been savaged for this advice this week (she put it on Twitter) with the young asking her exactly how, burdened by student debt, high housing costs and stagnant real wages, any of them can ever dare to dream of saving at this kind of level. But it’s unfair to take this out on her: she is simply repeating some standard financial industry stuff – fund manager Fidelity offers almost exactly the same benchmarks on its website, for instance.

But despite the fact that they sound precise and scientific, these benchmarks are really fairly arbitrary. The fund management industry is a huge selling machine, one that uses the same greed- and fear-related sales pitches as everyone else to flog product (the more we save, the more they earn). But in real life it is impossible to project 40 years into the future in this super-tidy way.

The first important thing to note is that given how many of us intend to work way past our official retirement age and how many of us end up un-retiring, even when we do retire, the idea that we must save a set amount of cash and live on that cash and only that cash for ever seems ridiculously old-fashioned. Very few of us will rely on nothing but specific retirement savings from the age of 60 on.

The second is that your own situation probably isn’t as bad as you think. Almost everyone is now saving something. If you have a defined benefit pension with your employer (if you work in the public sector for instance), you are doing just fine. If you are in an auto-enrolment scheme you won’t be saving enough to satisfy Chatzky, but you will have made a start – and by 2019, you will be saving 8% of your total income automatically. If you take your next few pay rises and ask to have them immediately recycled into your pension, you will be close to retirement clover before you know it.

The third point is rather more heretical. Any fund managers reading should prepare themselves. Life is a constant balance between the needs of the present and the needs of the future. When you are young, the present seems a lot more important. It’s hard to think about saving. And with money too tight to mention, it’s even harder to save. In this situation, using fear to push people into saving can be counterproductive: very few people attempt to climb mountains that look impossible to climb.

Good advice from the industry then would be to tell people that anything is better than nothing; that they need to find their own balance between prioritising consumption today and consumption in retirement (every pound saved represents consumption deferred); and that saving into inexpensive funds with sensible managers will be almost as important to the end result as how much is saved in the first place.

The government could help here. It could push up auto-enrolment pension totals a little (it’s easy to save when it is done for you). It could stop bothering the young to save and start putting in place extra incentives for those in their 40s and 50s to save faster: this is the age when people start to think properly about financing retirement and when they have the cash to do it.

And finally they could drop firm hints to central bankers about the effect of their dismal interest rate policies on retirees. Long-term gilt yields have a direct impact on annuity rates (the simplest way of producing an income from your retirement cash is to buy an annuity). In 2007, before our crazy age of monetary experimentation, £100,000 brought you an annuity income of well over £6,000. Today, with rates at 0.5%, you’d be lucky to scrape £5,000. When that changes, the future will begin to look rather better – whether you’ve listened to Chatzky or not.

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